SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[x] Quarterly Report Pursuant to Section 13 or 15(d) of The Securities Exchange
Act of 1934
For the Quarterly Period Ended March 31, 2003
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of The Securities Exchange
Act of 1934
For the Transition Period from _________ to ___________
Commission File Number: 333-43770
SLS INTERNATIONAL, INC.
-----------------------------------------------------------------
(Exact Name of Small Business Issuer as Specified in its Charter)
Delaware 52-2258371
---------------------------------------- ---------------------------------
(State of Incorporation) (IRS Employer Identification No.)
3119 South Scenic
Springfield, Missouri 65807
---------------------------------------- ---------------------------------
(Address of Principal Executive Offices) (Zip Code)
Issuer's Telephone Number, Including Area Code: (417) 883-4549
N/A
----------------------------------------------------
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING
THE PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required
to be filed by Section 12, 13 or 15(d) of the Exchange Act after the
distribution of securities under a plan confirmed by a court. N/A Yes [ ] No [ ]
On June 5, 2003, 23,196,528 shares of SLS International, Inc. common
stock were outstanding.
Transitional Small Business Disclosure Format (check one):
Yes [ ] No [x]
SLS INTERNATIONAL, INC.
INDEX
PART I. FINANCIAL INFORMATION
Page No.
Item 1. Financial Statements
Condensed Balance Sheet 1
Condensed Statement of Operations 2
Condensed Statement of Cash Flows 3
Notes to Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Item 3. Controls and Procedures 14
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 15
Item 6. Exhibits and Reports on Form 8-K 15
Signature 16
Certifications 17
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
------- --------------------
SLS INTERNATIONAL, INC.
CONDENSED BALANCE SHEET
March 31, December 31,
2003 2002
----------- -----------
(unaudited) (audited)
Assets
Current assets:
Cash $ 52,020 $ 4,240
Accounts receivable, less allowance for doubtful accounts of
of $132,396 for March 31, 2003 and December 31, 2002 26,196 165,024
Inventory 324,502 261,573
Prepaid expenses and other current assets 5,397 6,936
----------- -----------
Total current assets 408,115 437,773
----------- -----------
Fixed assets:
Vehicles 31,026 31,026
Equipment 55,083 55,083
Leasehold improvements 3,376 3,376
----------- -----------
89,485 89,485
Less accumulated depreciation 65,965 63,261
----------- -----------
Net fixed assets 23,520 26,224
----------- -----------
$ 431,635 $ 463,997
=========== ===========
Liabilities and Shareholders' Deficit
Current liabilities:
Current maturities of long-term debt and notes payable $ 414,150 $ 414,720
Accounts payable 486,468 417,449
Due to shareholders 23,099 23,193
Accrued liabilities 195,904 170,897
----------- -----------
Total current liabilities 1,119,621 1,026,259
----------- -----------
Commitments and contingencies:
Shareholders' deficit:
Preferred stock not issued but owed to buyers, $.001 par,
5,000,000 shares authorized; 281,940 and 315,000 shares
at March 31, 2003 and December 31, 2002 282 315
Discount on preferred stock (108,486) (233,294)
Contributed capital - preferred 1,942,970 1,852,183
Common stock, $.001 par; 75,000,000 shares authorized;
23,193,528 shares and 21,453,528 shares issued at
March 31, 2003 and December 31, 2002 23,194 21,454
Common stock not issued but owed to buyers; 442,000 shares and
'1,222,000 shares at March 31, 2003 and December 31, 2002 442 1,222
Contributed capital - common 3,478,730 3,386,624
Unamortized cost of stock issued for services (371,613) (524,984)
Retained deficit (5,653,506) (5,065,782)
----------- -----------
Total shareholders' deficit (687,986) (562,262)
----------- -----------
$ 431,635 $ 463,997
=========== ===========
The accompanying notes are an integral part of these
condensed financial statements.
1
SLS INTERNATIONAL, INC.
CONDENSED STATEMENT OF OPERATIONS
For The Three Months Ended
March 31,
-------------------------------
2003 2002
----------- ------------
(unaudited)
Revenue $ 104,777 $ 135,186
Cost of sales 57,436 85,111
----------- ------------
Gross profit 47,341 50,075
General and administrative expenses 502,149 498,497
----------- ------------
Loss from operations (454,808) (448,422)
Other income (expense):
Interest expense (7,637) (6,433)
Interest and miscellaneous, net 8,000 7
----------- ------------
363 (6,426)
----------- ------------
Loss before income tax (454,445) (454,848)
Income tax provision -- --
----------- ------------
Net loss (454,445) (454,848)
----------- ------------
Deemed dividend associated with beneficial conversion
of preferred stock (133,278) (69,765)
----------- ------------
Net loss availiable to common shareholders $ (587,723) $ (524,613)
=========== ============
Basic and diluted earnings per share $ (0.03) $ (0.03)
=========== ============
Weighted average shares outstanding 23,095,528 20,892,278
=========== ============
The accompanying notes are an integral part of these
condensed financial statements.
2
SLS INTERNATIONAL, INC.
CONDENSED STATEMENT OF CASH FLOWS
For The Three Months Ended
March 31,
-----------------------------
2003 2002
--------- ---------
(unaudited)
Operating activities:
Net loss $(454,445) $(454,848)
Adjustments to reconcile net income to cash flows
from operating activities:
Depreciation and amortization 2,704 3,646
Amortization of cost of stock issued for services 246,371 64,927
Change in assets and liabilities-
Accounts receivable, less allowance for doubtful accounts 138,828 2,131
Inventory (62,929) 35,444
Prepaid expenses and other current assets 1,539 512
Accounts payable 69,019 46,328
Due to shareholders (94) (2,000)
Accrued liabilities 25,007 11,334
--------- ---------
Cash used in operating activities (34,000) (292,526)
--------- ---------
Financing activities:
Sale of common stock 82,350 243,500
Borrowing of notes payable - 5,000
Repayments of notes payable (570) (4,364)
--------- ---------
Cash provided by financing activities 81,780 244,136
--------- ---------
Increase (decrease) in cash 47,780 (48,390)
Cash, beginning of period 4,240 48,390
--------- ---------
Cash, end of period $ 52,020 $ --
========= =========
Supplemental cash flow information:
Interest paid $ 1,295 $ --
Income taxes paid (refunded) -- --
Noncash investing activities:
Stock issued and options granted for services $ 93,000 $ 318,000
The accompanying notes are an integral part of these
condensed financial statements.
3
SLS INTERNATIONAL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements at March 31,
2003 have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-QSB and reflect all adjustments which, in the
opinion of management, are necessary for a fair presentation of
financial positions as of March 31, 2003 and results of operations and
cash flows for the three months ended March 31, 2003. All such
adjustments are of a normal recurring nature. The results of operations
for the interim period are not necessarily indicative of the results
expected for a full year. Certain amounts in the 2002 financial
statements have been reclassified to conform to the 2003 presentations.
The statements should be read in conjunction with the financial
statements and footnotes thereto included in the Company's Form 10-KSB
for the year ended December 31, 2002.
NOTE 2 - COMMITMENTS AND CONTINGENCIES
Going Concern
The accompanying unaudited condensed financial statements at March 31,
2003 have been prepared in conformity with generally accepted
accounting principles which contemplate the continuance of the Company
as a going concern. The Company has suffered losses from operations
during the three months ended March 31, 2003 and the years ended
December 31, 2002, 2001, 2000, and 1999. The Company's cash position
may be inadequate to pay all of the costs associated with establishing
a market for sales of its loudspeakers. Management intends to use
borrowings and security sales to mitigate the effects of its cash
position, however no assurance can be given that debt or equity
financing , if and when required, will be available. The unaudited
condensed financial statements do not include any adjustments relating
to the recoverability and classification of recorded assets and
classification of liabilities that might be necessary should the
Company be unable to continue in existence.
NOTE 3 - NOTES PAYABLE
The interest rate on the current notes range from 7% to 10% and all are
past due or demand notes.
NOTE 4 - STOCK TRANSACTIONS
In May, 2001, the Company completed a public offering. The number of
shares sold was 4,000,000. Included with the purchase of the shares was
a Class A warrant and a Class B warrant. The Class A warrants expire on
August 4, 2003 and are exercisable at a price of $.50 per share. The
Class B warrant has a term of 2 years and are exercisable at a price of
$3.00 per share. The warrants are detachable from the common stock but
4
are not separable from each other until the Class A warrant is
exercised.
From January 1, 2003 to March 31, 2003, no Class A warrants were
exercised. As of March 31, 2003, 2,000 shares of common stock purchased
through the exercise of the A warrants in the year ended December 31,
2002 had not been issued and therefore are shown on the balance sheet
as common stock not issued but owed to buyers. 3,111,000 Class A
warrants are outstanding as of March 31, 2003. No Class B warrants have
been exercised as of March 31, 2003.
In the three months ended March 31, 2003, the Company sold 32,940
shares of preferred stock for $82,350. This preferred stock contained
beneficial conversion features. The features allows the holder to
convert the preferred to 10 shares of common stock after a one year
period. A discount on preferred shares of $8,470 relating to the
beneficial conversion feature was recorded on these sales which will be
amortized over a one year period beginning with the date the
shareholders purchased their shares. $133,278 was amortized to retained
earnings in the three months ended March 31, 2003. At March 31, 2003,
the unamortized beneficial conversion on preferred shares was $108,486.
In January of 2002, an agreement was signed with Office Radio Network
for consulting services to be performed from January 5, 2002 to January
5, 2003. As compensation for consulting services, the Company gave
Office Radio Network $15,000 and issued 150,000 shares of common stock.
The shares of common stock were issued on November 19, 2002. Using the
market value on the date the agreement was signed, the shares were
valued at $111,000 and recorded as a debit in the equity section of the
balance sheet as unamortized cost of stock issued for services. The
expense will be amortized over the one year period of the agreement.
Consulting expense relating to this agreement was $1,388 for the three
months ended March 31, 2003. On March 31, 2003, there was $0 remaining
in unamortized cost of stock issued for services on the balance sheet.
In January of 2002, three agreements were signed for consulting
services to be performed. The agreements paid 300,000 shares to the
consultants in exchange for $3,000, an executed note receivable for
$27,000, and services to be rendered. As of March 31, 2003, 200,000 of
the shares had not been issued and are therefore recorded as common
stock not issued but owed to buyers on these financial statements.
100,000 of the common shares were issued on November 19, 2002. Using
the market value on the date the agreements were signed, the shares
were valued at $237,000. Value of the shares over consideration given
is $207,000 and is recorded as a debit in the equity section of the
balance sheet as unamortized cost of stock issued for services. The
5
expense will be amortized over a one year period. Consulting expense
relating to these agreements was $8,790 for the three months ended
March 31, 2003. On March 31, 2003 there was $0 remaining in unamortized
cost of stock issued for services on the balance sheet. A valuation
allowance of $27,000 has been used to offset the resulting note
receivable from the transaction and therefore $0 is reflected in the
asset section of the balance sheet for the note receivables.
In April of 2002, an agreement was signed with The Equitable Group, LLC
for consulting services to be performed from March 26, 2002 to
September 26, 2002. As compensation for consulting services, the
Company agreed to issue 600,000 shares of common stock, of which
100,000 were nonrefundable, to the consultant. The Company issued
100,000 shares on April 9, 2002. Using the market value on the date the
agreement was signed, the shares were valued at $51,000 and recorded as
a debit in the equity section of the balance sheet as unamortized cost
of stock given for services. On May 2, 2002, the Company terminated the
agreement. Upon termination of the agreement all unamortized costs were
amortized as consulting expense.
In April of 2002, an agreement was signed with Muir, Crane, & Co. for
consulting services to be performed April 2, 2002 to April 2, 2003. As
compensation for consulting services the Company agreed to pay a
retainer of $4,000 per month and issue 200,000 shares of common stock.
100,000 shares were issued on April 9, 2002 and 100,000 shares were
issued on July 18, 2002. Using the market value on the date the
agreement was signed, the shares were valued at $95,000 and recorded as
a debit in the equity section of the balance sheet as unamortized cost
of stock issued for services. At December 31, 2002, the consulting
agreement had been terminated and all costs were amortized.
In April of 2002, an agreement was signed with Sam Hamra for consulting
services to be performed April 18, 2002 to April 18, 2003. As
compensation for consulting services the Company agreed to issue 70,000
shares of common stock. 70,000 shares of common stock were issued on
April 18, 2002. Using the market value on the date the agreement was
signed, the shares were valued at $39,200 and recorded as a debit in
the equity section of the balance sheet as unamortized cost of stock
issued for services. As compensation, Mr. Hamra was also issued options
to purchase 100,000 shares of preferred stock at a strike price of
$2.50 per share. This preferred stock was convertible into 1,000,000
shares of common stock after a period of one year. The options expire
when the preferred stock offering closes. The closing date has been
extended to July 31, 2003. Using the Black-Scholes pricing model, the
options were valued at $311,222 and shown as a debit in the equity
section of the balance sheet as unamortized cost of stock issued for
6
services. At December 31, 2002, the consulting agreement had been
terminated and all costs were amortized.
In June of 2002, an agreement was signed with Liquid Solutions Corp.
for consulting services to be performed June 10, 2002 to September 10,
2002. As compensation for consulting services the Company agreed to
issue 500,000 shares of common stock. 500,000 shares of common stock
were issued on June 19, 2002. Using the market value on the date the
agreement was signed, the shares were valued at $155,000 and recorded
as a debit in the equity section of the balance sheet as unamortized
cost of stock issued for services. The expense will be amortized over
the three months of the agreement.
In August of 2002, an agreement was signed with Atlantic Services,
Ltd., a foreign corporation based in Costa Rica, for consulting
services to be performed August 15, 2002 to August 15, 2003. As
compensation for consulting services the Company agreed to issue
125,000 shares of common stock. 125,000 shares of common stock were
issued on August 15, 2002. Using the market value on the date the
agreement was signed, the shares were valued at $43,750 and recorded as
a debit in the equity section of the balance sheet as unamortized cost
of stock issued for services. The expense will be amortized over the
one year period of the agreement. Consulting expense relating to this
agreement was $10,937 for the three months ended March 31, 2003. On
March 31, 2003, there was $16,188 remaining in unamortized cost of
stock issued for services on the balance sheet.
In September of 2002, an agreement was signed with Art Malone, Jr. for
consulting services to be performed September 10, 2002 to March 10,
2003. As compensation for consulting services the Company agreed to
issue 250,000 shares of common stock upon signing of the agreement and
another 250,000 shares upon the consummation or signing of a celebrity
brought directly or indirectly by Mr. Malone as an endorser. 250,000
shares of common stock were issued on September 17, 2002. As of March
31, 2003 no other shares have been issued in regards to this agreement.
Using the market value on the date the agreement was signed, the shares
were valued at $60,000 and recorded as a debit in the equity section of
the balance sheet as unamortized cost of stock issued for services. The
expense will be amortized over the six month period of the agreement.
Consulting expense relating to this agreement was $22,800 for the three
months ended March 31, 2003. On March 31, 2003, there was $0 remaining
in unamortized cost of stock issued for services on the balance sheet.
In October of 2002, an agreement was signed with Patrick Armstrong of
Titan Entertainment Group for consulting services to be performed
7
November 5, 2002 to November 5, 2003. As compensation for consulting
services the Company agreed to issue 100,000 shares of common stock and
250,000 options for 250,000 shares of common stock. The options have a
strike price of $.30 and expire ten years from date of issuance.
100,000 shares of common stock were issued on November 5, 2002. Using
the market value on the date the agreement was signed, the shares were
valued at $39,000 and recorded as a debit in the equity section of the
balance sheet as unamortized cost of stock issued for services. Using
the Black-Scholes pricing model, the options were valued at $57,471 and
recorded as a debit in the equity section of the balance sheet as
unamortized cost of stock issued for services. All costs will be
amortized over the one year period of the agreement. Consulting expense
relating to this agreement was $24,118 for the three months ended March
31, 2003. On March 31, 2003, there was $55,343 remaining in unamortized
cost of stock issued for services on the balance sheet.
In October of 2002, an agreement was signed with Larry Stessel of Titan
Entertainment Group for consulting services to be performed November 5,
2002 to November 5, 2003. As compensation for consulting services the
Company agreed to issue 100,000 shares of common stock and 250,000
options for 250,000 shares of common stock. The options have a strike
price of $.30 and expire ten years from date of issuance. 100,000
shares of common stock were issued on November 5, 2002. Using the
market value on the date the agreement was signed, the shares were
valued at $39,000 and recorded as a debit in the equity section of the
balance sheet as unamortized cost of stock issued for services. Using
the Black-Scholes pricing model, the options were valued at $57,471 and
recorded as a debit in the equity section of the balance sheet as
unamortized cost of stock issued for services. All costs will be
amortized over the one year period of the agreement. Consulting expense
relating to this agreement was $24,118 for the three months ended March
31, 2003. On March 31, 2003, there was $55,343 remaining in unamortized
cost of stock issued for services on the balance sheet.
In December of 2002, an agreement was signed with Atlantic Services,
Ltd., a foreign corporation based in Costa Rica, for consulting
services to be performed December 2, 2002 to June 2, 2003. As
compensation for consulting services the Company agreed to issue
300,000 shares of common stock and the president of the Company agreed
to issue 300,000 options to purchase 300,000 shares of common stock
owned by him personally. The options have a strike price of $.05 and
expire 30 days after the current lock-up period ends on the president's
shares. 300,000 shares of common stock were issued on December 9, 2002.
Using the market value on the date the agreement was signed, the shares
were valued at $114,000 and recorded as a debit in the equity section
of the balance sheet as unamortized cost of stock issued for services.
8
Using the Black-Scholes pricing model, the options were valued at
$99,099 and recorded as a credit to additional paid in capital - common
stock and a debit in the equity section of the balance sheet as
unamortized cost of stock issued for services. The cost will be
amortized over the six month period of the agreement. Consulting
expense relating to this agreement was $106,550 for the three months
ended March 31, 2003. On March 31, 2003, there was $84,742 remaining in
unamortized cost of stock issued for services on the balance sheet.
In December 2002, an agreement was signed with Worldwide Financial
Marketing, Inc. for consulting services to be performed December 15,
2002 to December 15, 2003. As compensation for consulting services the
Company agreed to issue 300,000 shares of common stock. 300,000 shares
of common stock were issued on December 13, 2002. Using the market
value of the date the agreement was signed, the shares were valued at
$120,000 and recorded as a debit in the equity section of the balance
sheet as unamortized cost of stock issued for services. The cost will
be amortized over the one year period of the agreement. Consulting
expense relating to this agreement was $30,000 for the three months
ended March 31, 2003. On March 31, 2003, there was $84,667 remaining in
unamortized cost of stock issued for services on the balance sheet.
In February 2003, an agreement was signed with Tom Puccio for
consulting services to be performed February 25, 2003 to August 25,
2003. As compensation for consulting services the Company agreed to
issue 300,000 shares of common stock. 300,000 shares of common stock
were issued on February 25, 2003. Using the market value of the date
the agreement was signed, the shares were valued at $93,000 and
recorded as a debit in the equity section of the balance sheet as
unamortized cost of stock issued for services. The cost will be
amortized over the six month period of the agreement. Consulting
expense relating to this agreement was $17,670 for the three months
ended March 31, 2003. On March 31, 2003, there was $75,330 remaining in
unamortized cost of stock issued for services on the balance sheet.
In the three months ended March 31, 2003, 66,000 shares of preferred
stock were converted into 660,000 shares of common stock. 420,000
shares were issued in February of 2003. The remaining 240,000 shares
were unissued at March 31, 2003 and are therefore shown in common stock
not issued but owed to buyers.
NOTE 5 - SUBSEQUENT EVENTS
In April 2003, 60,000 shares of preferred stock were converted into
600,000 shares of common stock.
On April 19, 2003, the board of directors approved and ratified all the
consulting agreements detailed in Note 4.
9
In May 2003, the expiration date on the Class A warrants was extended
to August 4, 2003.
NOTE 6 - UNAMORTIZED COST OF STOCK ISSUED FOR SERVICES
As detailed in Note 4, the Company issued or agreed to issue 2,795,000
shares of common stock and 1,500,000 options as part of consulting
agreements in the year ended December 31, 2002 and the three months
ended March 31, 2003. The value of stock issued and options granted
totaled $1,692,213 for the period of January 1, 2002 through March 31,
2003. This cost is recorded as a debit in the equity section of the
balance sheet as unamortized cost of stock issued for services. The
balance will be amortized into consulting expense over the lives of the
various consulting agreements. $1,074,229 for the year ended December
31, 2002 and $246,371 for the three months ended March 31, 2003, was
amortized into consulting expense for those periods. Unamortized cost
of stock issued for services was $371,613 as of March 31, 2003.
NOTE 7 - RELATED PARTY TRANSACTIONS
On January 18, 2002, the Company borrowed $5,000 from a friend of the
president of the Company. The note is a demand note and bears interest
at 7%. Monthly interest payments totaling $45 have been paid in the
three months ended March 31, 2003. The note balance on March 31, 2003
was $5,000.
On November 13, 2002, the Company borrowed $50,000 from a friend of the
president of the Company. The note is a demand note and bears interest
at 10%. Monthly interest payments totaling $1,250 have been paid in the
three months ended March 31, 2003. The note balance on March 31, 2003
was $50,000.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
------- ------------------------------------
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
------------------------------------------------
OVERVIEW
We manufacture premium-quality loudspeakers and sell them through our
dealer networks. The speakers use our proprietary ribbon-driver technology and
are generally recognized in the industry as high-quality systems. We sell a
Professional Line of loudspeakers, a Commercial Line of loudspeakers, and Home
Theatre systems.
From the early 1970's through 1999 we derived substantially all of our
revenue from marketing, renting, selling and installing sound and lighting
systems. In June 1999, due to the favorable customer acceptance of our recently
custom designed loudspeaker systems, we ceased these historical operations and
began focusing all efforts towards becoming a loudspeaker manufacturer and
selling to dealers and contractors on a wholesale basis. As a result, we have
been essentially in a development stage, as we are bringing to market products
that we introduced in 2000 and 2001 and designing and bringing to market
additional products.
In June 2000, we asked dealers and distributors to sell our
Professional Line of products. These dealers and distributors started to form
our current network of approximately 50 dealers and 7 foreign distributors and
we began shipping to them. However, most of the Professional Line required new
ribbon drivers that we completed and implemented into the product line in early
2001.
In September 2000, we introduced our Home Theatre systems and sales for
those systems began immediately. From September through December 2000, we added
20 new Home Theatre dealers in the US and began marketing efforts to establish
distributors and dealers outside the US.
In June 2001, we introduced a Commercial Line of loudspeakers that
utilize our PRD500 Ribbon Driver and in September of 2001 we finished the
development of our PRD1000 Ribbon Driver and began implementing them into our
Professional Line. Our PRD drivers upgraded the previous drivers that we
purchased from third-party manufacturers and the cost to us is one-sixth of the
price that we had been paying for the previous drivers.
SLS International, Inc. was formed on July 25, 2000 and had no previous
operations. On the same date, this corporation merged with Sound and Lighting
Specialist Inc., its sole shareholder. All of the financial information reported
for periods prior to the merger are the results of operations of Sound and
Lighting Specialist, Inc. All of the operating activity reported for periods
after the merger are the results of operations of SLS International, Inc. After
effectiveness of the merger, Sound and Lighting Specialist, Inc. ceased to exist
as a separate corporate entity. The information in this section should be read
together with the financial statements, the accompanying notes to the financial
statements and other sections included in this report.
11
RESULTS OF OPERATIONS
Quarter ended March 31, 2003 as compared to the quarter ended March 31,
2002. For the quarter ended March 31, 2003, revenue decreased to $104,777 from
$135,186 in 2002, a 22% decrease, resulting primarily from inventory delays that
prevented the completion of a backlog of orders and deliveries. Our gross profit
percentage increased to approximately 45% in the 2003 period from approximately
37% in the 2002 period, primarily as a result of the sale of more higher-margin
products, as well as increased manufacturing efficiencies. Our net loss was
virtually unchanged at $454,445 in the 2003 quarter, compared to $454,848 in the
first quarter of 2002.
General and administrative expenses for the 2003 first quarter
increased slightly to $502,149 from $498,497 in the 2002 first quarter. In the
2003 quarter, we incurred $246,371 of non-cash cost for consulting expenses
relating to the issuance of stock under consulting agreements entered into in
the 2003 first quarter and prior periods, as compared to $64,927 of non-cash
cost for consulting expenses in the 2002 first quarter. We also incurred $0 of
bad debt expense in the 2003 first quarter, compared to $109,352 in the 2002
first quarter.
Interest expense increased to $7,637 in the 2003 first quarter as
compared to $6,433 in the 2002 first quarter, due to increased borrowings. In
the 2003 first quarter, we had $8,000 of interest and miscellaneous income
related to the collection of accounts receivable that had been written off in
prior periods.
Quarter ended March 31, 2002 as compared to the quarter ended March 31,
2001. For the quarter ended March 31, 2002, revenue increased to $135,186 from
$39,748 in 2001, a 240% increase, resulting primarily from the expansion of our
loudspeaker product line and the continued growth in sales of our loudspeakers.
Our gross profit percentage decreased to approximately 37% in the 2002 period
from approximately 46% in the 2001 period, primarily as a result of sales made
to representatives and dealers at introductory and sales sample prices. Also,
certain products were given to industry professionals for their use and for
later promotions using their comments and names. Despite the revenue increase of
$95,438, our net loss increased by $256,920, to $454,848 in the first quarter of
2002 as compared to a net loss of $206,117 in the comparable quarter of 2001.
The greater net loss was the result of increased general and administrative
expenses, discussed below.
General and administrative expenses for the 2002 first quarter
increased to $498,497 from $209,929 in the 2001 first quarter, primarily as a
result of $109,352 of bad debt expense (compared to $0 in the 2001 quarter) and
$64,927 of expenses amortized in the quarter reflecting a portion of the fair
value of stock issued under consulting agreements entered into during the
quarter and in prior periods. A total of $318,000 in non-cash costs were accrued
under these consulting agreements, and the remainder of such expenses will be
amortized in future periods. Other factors causing the increase in general and
administrative expenses include a new employee handling our development of a
transducer, a new controller for our financial operations, a new national sales
manager, increased trade show participation to promote our products, and
consultant expense targeted toward increased exposure and relations with top
musical artists.
12
Interest expense decreased to $6,433 in the 2002 first quarter as
compared to $14,621 in the 2001 first quarter, due to decreased borrowings.
FINANCIAL CONDITION
On March 31, 2003, our current liabilities exceeded current assets by
$711,506, compared to $588,486, on December 31, 2002. Total liabilities exceeded
total assets by $687,986, compared to $562,262 on December 31, 2002. The
increased working capital deficit was primarily due to a reduction in accounts
receivable of $138,828 and a $69,019 increase in accounts payable, partially
offset by increases of $62,929 in inventory and $47,780 in cash. On March 31,
2003, we had a backlog of orders of approximately $100,000.
We have experienced operating losses and negative cash flows from
operating activities in all recent years. The losses have been incurred due to
the development time and costs in bringing our products through engineering and
to the marketplace. In addition we have not paid notes payable and accounts
payable on due dates. The report of our accountants contains an explanatory
paragraph indicating that these factors raise substantial doubt about our
ability to continue as a going concern.
We are experiencing significant cash shortages; we had $52,020 in cash
on March 31, 2003. In order to continue operations, we have been dependent on
raising additional funds and have continued to sell preferred stock in the
beginning of 2003 to raise capital. In the first quarter of 2003 we sold
preferred stock for $82,350.
In the first quarter of 2003, we entered into a six-month consulting
agreement that required us to issue 300,000 shares of common stock. Total
non-cash cost under such agreement is $93,000, $17,670 of which is reflected as
amortized expenses in the quarter and the remainder of which is to be amortized
in subsequent periods over the remaining term of the agreement. The difference
between such total cost and the amount amortized is reflected as unamortized
cost of stock issued for services on the balance sheet.
Long-term debt and notes payable remained virtually unchanged at
$414,150 on March 31, 2003. One note totaling $1,517 is secured with equipment;
and most of the remaining borrowings are from individuals, are unsecured and
matured in the first quarter of 2002. However, these notes are payable to
existing shareholders that are not making a demand on the notes and will
continue to accrue the 7% interest (10% in the case of one note with a principal
amount of $50,000) for an indefinite period of time. We expect that these
shareholders will continue to permit these notes to remain outstanding, but they
have the right to demand full payment at any time and they may do so, which
would have a material adverse effect on our financial condition.
There is intense competition in the speaker business with other
companies that are much larger and national in scope and have greater financial
resources than we have. We will require additional capital to continue our
growth in the wholesale speaker market. We are relying upon our ability to
obtain the necessary financing through the issuance of equity and upon our
relationships with our lenders to sustain our viability.
13
In the past, we have been able to privately borrow money from
individuals by the issuance of notes, preferred stock and common stock. We
intend to continue to do so as needed. However, we cannot be certain that we
will continue to be able to successfully obtain such financing. If we fail to do
so, we may be unable to continue as a viable business.
FORWARD LOOKING INFORMATION
This report, as well as our other reports filed with the SEC and our
press releases and other communications, contain forward-looking statements made
pursuant to the safe harbor provisions of the Securities Litigation Reform Act
of 1995. Forward-looking statements include all statements regarding our
expected financial position, results of operations, cash flows, dividends,
financing plans, strategy, budgets, capital and other expenditures, competitive
positions, growth opportunities, benefits from new technology, plans and
objectives of management, and markets for stock. These forward-looking
statements are based largely on our expectations and, like any other business,
are subject to a number of risks and uncertainties, many of which are beyond our
control. The risks include those stated in the "Risk Factors" section of our
Annual Report on Form 10-KSB and economic, competitive and other factors
affecting our operations, markets, products and services, expansion strategies
and other factors discussed elsewhere in this report, our Annual Report on Form
10-KSB and the other documents we have filed with the Securities and Exchange
Commission. In light of these risks and uncertainties, there can be no assurance
that the forward-looking information contained in this report will in fact prove
accurate, and our actual results may differ materially from the forward-looking
statements.
ITEM 3. CONTROLS AND PROCEDURES
------- -----------------------
Our independent auditors recently completed their audit of our financial
statements for the year ended December 31, 2002. As a result of such audit,
we have been required to make restatements and reclassifications of our
unaudited financial statements filed for the quarters ended March 31, June
30 and September 30, 2002. Such restatements and reclassifications call
into question the effectiveness of our disclosure controls and procedures.
We are currently considering enhancements to our controls and procedures,
particularly with respect to the preparation of our quarterly unaudited
financial statements.
As of May 1, 2003, our Chief Executive Officer and Chief Financial Officer
evaluated the effectiveness of the design and operation of our disclosure
controls and procedures. Based on that evaluation, the Chief Executive
Officer and Chief Financial Officer concluded that our disclosure controls
and procedures were effective as of March 31, 2003 for purposes of
preparation of this Quarterly Report on Form 10-QSB. There have been no
significant changes in the Company's internal controls or in other factors
that could significantly affect internal controls subsequent to March 31,
2003, although as stated above, enhancements are under consideration.
14
PART II - OTHER INFORMATION
Item 2. Changes in Securities.
------- ----------------------
In the quarter ended March 31, 2003, the Company sold 32,940 shares of
preferred stock for $82,350 in cash. All sales were made to accredited
investors. Each share of preferred stock is convertible into ten shares of
common stock after one year. The sales were made in reliance on Section 4(2) of
the Securities Act of 1933, as amended.
We also issued 300,000 shares of common stock under consulting
agreements entered into during the quarter ended March 31, 2003. The issuances
were made in reliance on Section 4(2) of the Securities Act of 1933, as amended.
The net proceeds from the sale of preferred stock in the first quarter
of 2003 were used for working capital purposes. We did not use any registered
securities broker-dealers in connection with any sales of stock. All of the
foregoing uses of proceeds were direct or indirect payments to nonaffiliates.
Item 6. Exhibits and Reports on Form 8-K.
------- ---------------------------------
(a) Exhibits. The following are being filed as exhibits to
this Report:
Exhibit No. Description of Exhibit
----------- ----------------------
10.1 Consulting Agreement, dated February 25, 2003
between the Company and Tom Puccio
99.1 Chief Executive Officer and Chief Financial
Officer Certification of Periodic Report
(b) Reports on Form 8-K. We filed no Reports on Form 8-K during
the quarter ended March 31, 2003.
15
SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SLS INTERNATIONAL, INC.
----------------------------
(Registrant)
Date: June 16, 2003 By /s/ John Gott
-----------------------------------
John Gott
President and
Chief Financial Officer
(Principal Financial Officer)
16
CERTIFICATIONS
---------------
I, John Gott, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of SLS
International, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a -14 and 15d-14) for the registrant
and have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
17
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
/s/ John Gott
--------------------------------------------------------------
John Gott, Chief Executive Officer and Chief Financial Officer
June 16, 2003
18